Scaling up the Senior Managers and Certification Regime: Thinking Ahead

The UK Senior Managers and Certification Regime (SMCR) is being extended to almost all financial services firms authorised by the FCA. This will include many firms in the payment services, peer-to-peer lending, crowdfunding and robo-asset management sectors. The plans are currently under consultation and we expect the regime to be implemented towards the end of 2018.

The SMCR was introduced in response to the 2008 banking crisis and the LIBOR rigging scandal to enhance individual accountability and create a culture of risk management and compliance. It has applied to banks, building societies and certain investment firms since March 2016, with a modified regime for insurers (known as SIMR). It is anticipated the extended regime will largely follow the current SMCR.

This post considers the extension of the SMCR and suggests some next steps for newly ‘in scope’ firms.

What are the main elements of the SMCR?

The core regime comprises three components:

Senior managers regime: this replaces the “approved persons” regime and applies to senior individuals in a firm. Anyone whose role involves a “senior manager function” must be pre-approved by the FCA. Each senior manager must also have a statement of responsibilities documenting their senior manager functions and the “prescribed responsibilities” they hold.

Certification regime: this applies to employees who are not senior managers, but whose jobs mean they can have a big impact on customers, markets or the authorised firm – such roles are referred to as “certification functions”. Firms themselves (rather than the FCA) must certify at least annually that such employees are fit and proper to perform their role.

Conduct rules: these apply to almost all employees who work in the financial services industry. Firms must ensure staff are appropriately trained and understand their obligations under the rules.

Who will the extended SMCR apply to?

Firms authorised by the FCA will be in scope of the extended SMCR. This will mean that approximately 50,000 additional firms, including asset managers and consumer credit firms, will be subject to the regime.

The proposed regime contains three new classifications of firm. Most will be subject to the “core” regime. Firms which currently only need FCA approval for certain controlled functions will be subject to a lighter regime, and larger firms whose potential impact on consumers warrants more attention will be subject to an “enhanced” regime.

What will the extension of the SMCR mean in practice for newly ‘in scope’ firms?

Whilst FCA-authorised firms will be familiar with complying with the approved persons regime, the extension of the SMCR will require them to think more carefully about the allocation (and delegation) of responsibility within the business. Small fintech firms and start-ups are likely to have fewer senior personnel and the proposed regime takes a proportionate approach. The FCA does not intend firms to reorganise or hire new people to meet the requirements and individual managers can be responsible for multiple senior management functions and prescribed responsibilities.

Similarly, it is proposed the certification functions will only apply where the firm has people in the relevant roles. This means that in firms with a small number of senior individuals (who will be senior managers) supported by administrative staff, it is likely that fewer people will fall within the certification regime. Where the certification regime is applicable, firms will need to implement procedures to check and confirm that the relevant employees are fit and proper to perform their roles.

It is proposed that the conduct rules will apply to both a firm’s regulated and unregulated financial services activities, including any related ancillary activities. Senior managers, NEDs, certified functions and all other employees except ancillary staff (for example cleaners, receptionists, catering and postroom staff) will be subject to the rules. Whilst the proposed application of the conduct rules under the extended SMCR is narrower than under the current SMCR, firms must provide appropriate training to ensure the rules, both in letter and spirit, are complied with. Firms must also have adequate procedures in place to notify the FCA of any formal disciplinary actions taken in respect of any breaches of the rules.

Thinking ahead

It is crucial for firms that will be newly within scope to think ahead and prepare for implementation of the changes, even before the new regime is finalised. In particular, firms should:

Consider the FCA guidance to ascertain which type of firm within the regime you are likely to be.

Review company policies and procedures ready to be updated to reflect the new requirements.

Develop training for staff in respect of the conduct rules.

Consider which senior staff should be allocated each prescribed responsibility and senior management function.

Prepare for changes to processes including additional record keeping requirements.

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The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.Herbert Smith Freehills LLP is authorised and regulated by the Solicitors Regulation Authority.